Contradictory advice from two IFAs. - What to do?

EnglishMohican

I have an old deferred final salary pension scheme that is offering me a deal - take a "good" transfer value now and buy an annuity with it - or wait two and a half years and take a pension from the scheme. The annuity option would allow me to tailor the pension I received to suit myself - for instance £39k cash plus £6100 annual pension (50% joint and 5 year guarantee) while the scheme will pay a pension of £5800 in two and a half years. I could take a cash option which would reduce that pension.

The figure for the annuity does not provide any inflation cover while the one for the pension provides CPI limited to 5%.

There is also a possibility that the scheme pension will increase to nearly £9k when I reach 65. One IFA says this is to do with GMP - but I am not sure I believe it. There is very little supporting evidence for it and it does not fit the explanation of GMP pensions I have read on the board - its way too much. I am seeking clarification on that from the pension company. It seems to make a huge difference to the answer to me.

I have advice from two major IFA companies, one says take the annuity payment now while the second says leave it and take the inflation proof pension later. So the experts disagree and I am looking for wisdom from this board.

As a bit of background, I am 60 and have just been made redundant. I also have a second deferred final salary pension that pays out at 65 (£12k per annum), various personal pensions (maybe £8k per annum), state pensions eventually and significant savings. I can find money to live on for the next few years by for instance taking tax free cash from the personal pensions or from my savings. So I have lots of options - maybe too many! All advice gladly received.

tartanterra

EnglishMohican wrote: »

I have an old deferred final salary pension scheme that is offering me a deal - take a "good" transfer value now and buy an annuity with it - or wait two and a half years and take a pension from the scheme. The annuity option would allow me to tailor the pension I received to suit myself - for instance £39k cash plus £6100 annual pension (50% joint and 5 year guarantee) while the scheme will pay a pension of £5800 in two and a half years. I could take a cash option which would reduce that pension.

The figure for the annuity does not provide any inflation cover while the one for the pension provides CPI limited to 5%.

There is also a possibility that the scheme pension will increase to nearly £9k when I reach 65. One IFA says this is to do with GMP - but I am not sure I believe it. There is very little supporting evidence for it and it does not fit the explanation of GMP pensions I have read on the board - its way too much. I am seeking clarification on that from the pension company. It seems to make a huge difference to the answer to me.

I have advice from two major IFA companies, one says take the annuity payment now while the second says leave it and take the inflation proof pension later. So the experts disagree and I am looking for wisdom from this board.

As a bit of background, I am 60 and have just been made redundant. I also have a second deferred final salary pension that pays out at 65 (£12k per annum), various personal pensions (maybe £8k per annum), state pensions eventually and significant savings. I can find money to live on for the next few years by for instance taking tax free cash from the personal pensions or from my savings. So I have lots of options - maybe too many! All advice gladly received.

Maybe I'm a cynic, but is the advice given to you about taking an annuity now, based on commission?

Linton

From a quick calculation ISTM that the £5800, index linked in 2.5 years time is worth significantly more than £39K cash +£6100 fixed now. Its not a straightforward calculation but I would guess about 20% more; others with more experience will do doubt correct me if necx.

This is based on the current commercial annuity rates.

BUT there are many caveats. We dont know the details of you and your circumstances, presumably the IFAs are better informed. There may be other issues - for example is the index linked one payable to your spouse (if any) on your demise? Is this an issue? Do you actually need the £39K cash now? If you have an expensive debt that could well change the decision.

People often ask on this board whether to take a final salary pension or a cash offer with reduced pension. I do not remember any occasion when the conclusion was that the cash deal was better.

My suggestion would be to ask the IFAs to provide a detailed justification of their advice.

Just a check - these are real IFAs and not bank advisors or similar?

Tammer

Hi,

My thoughts, explained as briefly as possible:

• To get a better idea of whether you should take the annuity now, you should ask the IFA to provide you with an annuity quote on the exact same basis as the pension scheme provides. That way you're comparing like with like.

• There are a lot of companies these days "paying" people to take their money out of Final Salary schemes. This can be for sensible reasons - to mitigate their risk over the long term, but it can also be for dishonorable reasons, ensuring that you get less over the long term than you would have got leaving your benefits in the scheme. Think about this very carefully.

• Typically Final Salary schemes "contracted out" of the State Pension scheme (SERPS) and agreed to provide a benefit at least as good as SERPS. If your GMP at age 65 is higher than your final salary scheme, the scheme would have to provide this higher amount. This may be what the 2nd IFA was talking about. The pensions administration people at your old employer should be able to tell you if a) your scheme was contracted out b) what your GMP is c) what this means for you at age 65.

Tammer

dunstonh

I have advice from two major IFA companies, one says take the annuity payment now while the second says leave it and take the inflation proof pension later. So the experts disagree and I am looking for wisdom from this board.

I can see both sides of it and both could be right or wrong. Seeing as transferring from a defined benefit scheme to buy an annuity is wrong in the majority of cases (but not all) I would go with staying with the scheme if you are asking us to play the odds game.

If you do transfer it to an Immediate vesting personal pension then the GMP is lost and there could well be a difference if left until 65.

There are too many unknown variables here but with that limitation, I would go with sticking with the scheme.

Remember that the FSA consider a defined benefit pension transfer a mis-sale unless proven otherwise and around 99 times out of 100 it is best left where it is. So, if you are being persuaded that you are the 1 in 100 that its best to do then I would want to see damned clear evidence to support that.

EnglishMohican

tartanterra wrote: »

Maybe I'm a cynic, but is the advice given to you about taking an annuity now, based on commission?

That IFA is paid for by the Pensions Company but it is fee based independent of his conclusion. So it would have to be "protecting future business" rather than immediate profit.

He argues that maximising cash taken now (which that arrangement does) is good and provides flexibility.

The counter to that is that it depends whether I can invest it at a better rate than inflation - I rather doubt that at present.

EnglishMohican

Thank you Linton, Tammer and dunstanh.

@Linton. The indexed one is 50% joint with 5 year guarantee. That was the reason behind those options for the annuity figures.

I do not need the cash now and I do not have expensive debt.

The companies employing these IFAs are majors and do claim to be true IFA companies. The expertise of their employees may be open to debate.

@Tammer. As I understand it, my GMP value pension at 65 is about £4.5k - so less than the £5.8k and much less than the £9k. Thats why I doubt the £9k figure.

jamesd

EnglishMohican wrote: »

I have an old deferred final salary pension... of £5800 in two and a half years. ... The figure for the annuity does not provide any inflation cover while the one for the pension provides CPI limited to 5%. ... There is also a possibility that the scheme pension will increase to nearly £9k when I reach 65. One IFA says this is to do with GMP - but I am not sure I believe it. There is very little supporting evidence for it and it does not fit the explanation of GMP pensions I have read on the board - its way too much. I am seeking clarification on that from the pension company. It seems to make a huge difference to the answer to me.

It looks very hard to justify taking an annuity now. £5,800 with inflation linking is probably worth far more than a £6,100 level annuity and £39k lump sum. Unless your life expectancy is short. If there is GMP that'd be even worse.

Another possible case where the transfer value might be worth considering sometimes is if you'd use income drawdown to get a 100% spousal pension without reducing your income, as you would with an annuity. Don't know enough about the income situation of your spouse to know but given your personal pensions those are probably a better choice for this.

You always need to be very skeptical of these offers because they are designed to save the pension scheme money, not make you better off. As dunstonh notes, these deals are so often the worse choice that there are specific warnings against them.

EnglishMohican wrote: »

I am 60 and have just been made redundant.

That strikes me as the company trying to hit you while you're down and potentially vulnerable to needing an income that may cause you to make a bad decision.

EnglishMohican wrote: »

I also have a second deferred final salary pension that pays out at 65 (£12k per annum), various personal pensions (maybe £8k per annum), state pensions eventually and significant savings. I can find money to live on for the next few years by for instance taking tax free cash from the personal pensions or from my savings. So I have lots of options - maybe too many! All advice gladly received.

If you want money use the personal pensions. Their lump sums are best placed in a stocks and shares ISA where they can generate ongoing tax free interest income for you. S&S because the investments available i them pay out more than in cash ISAs. Might as well start taking income from them as well even if you don't need it, you can save that and invest it in ISAs later.

Doesn't look as though buying an annuity from your personal pensions is a good deal for you, given your guaranteed workplace pension incomes. Income drawdown gets you a 100% spousal pension with no reduction in the original income level and that can be a substantial benefit compared to buying an annuity.

jamesd

EnglishMohican wrote: »

That IFA is paid for by the Pensions Company but it is fee based independent of his conclusion. So it would have to be "protecting future business" rather than immediate profit.

Well, that's one big warning sign. Ignore that IFA. If you want another opinion get one from a different IFA that's truly independent.

EnglishMohican wrote: »

He argues that maximising cash taken now (which that arrangement does) is good and provides flexibility.

And what did he say about the relative value to you of the two options and how much money you'll be losing long term by doing it?

EnglishMohican wrote: »

The counter to that is that it depends whether I can invest it at a better rate than inflation - I rather doubt that at present.

That's easy enough to do. One way is retail bonds issued by insurance companies. Some of those have redemption yields over ten percent and there are retail bonds with running yields above inflation. Also various funds that have yields above inflation and some prospect of capital growth.

EnglishMohican wrote: »

I do not need the cash now and I do not have expensive debt.

Then you have nothing to gain from taking the almost certainly wrong choice of a transfer value.

If others are in your position please do advise them to get truly independent advice instead of relying on the IFA paid by the insurance company. The insurance company gets to select IFAs who are most likely to suggest what they want suggested.

You currently have an excellent mixture of guaranteed (by the PPF) inflation linked workplace pensions and personal pensions. Keep that mixture. It's a really good one to have.

dunstonh

That IFA is paid for by the Pensions Company but it is fee based independent of his conclusion. So it would have to be "protecting future business" rather than immediate profit.

Be on guard. he is employed by the employer. Not you. So, is he giving best advice to the company or giving best advice to you? It's a conflict of interests potentially as the company want to get you off the scheme and they are the one paying the bill.

tartanterra

EnglishMohican wrote: »

That IFA is paid for by the Pensions Company

Hmmm.....

Sounds like a different side of the same coin...

I would be very wary of this, and can think of no good reason why you would transfer out of a FSPS. Obviously, I am not in possession of all the facts, but on the face of it, it looks like they want you off their books (Is it because they don't want the expense of possible future liabilities - worried about how long you are going to live?).